Fleet News

Managing fleets into recovery - funding

A move to make business funding a key issue to be tackled by the new coalition government has been welcomed by leasing, rental and contract hire companies.

The British Vehicle Rental and Leasing Association describes business secretary Vince Cable’s announcement that lending is his first priority as a positive step.

“But the basic message for the industry is that the days of easy credit are long gone,” says chief executive John Lewis.

“Vehicle rental and leasing is a very capital intensive business and it was hard hit by the credit crunch. The sudden shortage of credit led to a large exodus of banks from the fleet funding market and we have lost nearly half the industry’s fund providers in the space of two years.

“At the same time, banks still involved with the sector have taken a much more risk-adverse approach, meaning that funding has been in limited supply and more expensive.”

According to Lewis, access to funding has improved recently. However, he fears that the imminent withdrawal or wind-down of the Bank of England’s quantitative easing programme and the regulatory requirements for banks to improve their balance sheets could have a major effect on the availability and cost of funding.

“Demand for leasing is set to increase, particularly in the SME market and the public sector, where the impending budget cuts will force organisations to examine the cost benefits of outsourcing,” he says.

So what pointers can fleet management companies offer on funding as politicians attempt to maintain the recovery?

Lenders are looking for secure partners – they want to place their funds with businesses that will be around for the long term. And this is making access to funding more difficult for some companies, according to Fleet Operations managing director Ross Jackson.

“Some customers will find themselves unable to source all their vehicle requirements from a single supplier – but this is not as bad as it seems,” he says.

“Clients who can’t get funding from a sole supplier are finding they can get all the funding they need from two or three suppliers – and though this does involve greater administration, the funding risk is spread and cost efficiency remains transparent at all times as two or three leasing companies bid on every order. This is the business model now coming to the fore.”

Businesses need to make sure they have the correct policy and that they are working with the right suppliers, believes Robert Wentworth James, head of sales and marketing at CLM.

Whichever funding method is used, impartiality is vital. Contract hire companies are unlikely to encourage clients to come off funded products and move toward non-funded products because this means they are likely to take as much profit.

“Independent consultants don’t care whether clients lease, buy outright, uses hire purchase, lease purchase or salary sacrifice – they simply give the recommendation,” Wentworth James says. “In many cases, coming up with the most efficient and appropriate funding for the way the company operates may result in a blend of finance acquisition methods.”

At Venson Automotive Solutions, managing director Samantha Roff points out that last year’s tax changes – the biggest in a decade – made it even more important for operators to fully understand whole life costs when considering their fleet policies.

The wholelife cost model takes all costs into account, including elements such as corporation tax, maintenance, fuel and insurance, so when a fleet is faced with two cars with identical list prices, they can see at a glance the one that will be the most cost efficient.

“Careful consideration needs to be given to funding options. Under the new tax rules, outright purchase is less efficient than leasing in most cases with contract hire a more tax efficient solution,” Roff says.

“With regard to contract hire, some cars valued at around £22,000 with emissions over 160g/km are now more expensive to lease than they were prior to April 1, 2009. Where a vehicle has a value over £22,000 and emissions above 160g/km, the benefits of the leasing disallowance compensate for the increase in capital allowances, making leasing a viable funding solution.”

Funding options

Contract hire
Vehicle not shown as a balance sheet asset and some or all rental can be offset against taxable profits.

Finance lease
You choose to pay for the vehicle over an agreed lease period or pay lower monthly rentals with a final payment based on the anticipated resale value.

Hire purchase
Vehicle becomes your property at the end of the period and interest elements of the HP fee can be offset against taxable profits.

Contract purchase
Purchase via monthly payments with ownership after a final balloon payment equal to the residual value.

Employee contract purchase.
Two categories: PCP, allowing employees to use company car allowance to fund payments; and Employee car ownership: Like PCP, but employer retains control of vehicle choice, replacement cycle, maintenance and insurance.

Salary sacrifice
Employee pays for a car out of their gross salary, saving on tax and National Insurance. Works best when tax saving exceeds substituted salary, which makes it most attractive on low CO2 emission cars.

Employee Car Ownership (ECO) scheme
Cash for car, where an employee who qualifies for a company car instead chooses to receive an additional allowance.

Outright purchase
Buying the vehicle outright – tends to be more popular with smaller companies and some van-based fleets. The company takes all the risk for residuals and maintenance.

Rental
Daily rental is a flexible method of sourcing vehicles that are required on a short-term or irregular basis.

Sale and leaseback/rentback
Leaseback is where a business sells its vehicles to a lessor and continues to use them under the terms of a lease. Same concept for rentback, but that involves no contract.

By Maurice Glover

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